Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2.a. In which direction will the substitution effect change the firm’s employment and capital s tock?b. In which direction will the scale effect change the firm’s employment and capital stock?c. Can we say conclusively whether the firm will use more or less labor? More or less c apital?
Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2.a. In which direction will the substitution effect change the firm’s employment and capital s tock?b. In which direction will the scale effect change the firm’s employment and capital stock?c. Can we say conclusively whether the firm will use more or less labor? More or less c apital?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Consider a firm for which production depends on two normal inputs, labor and capital, with prices w and r, respectively. Initially the firm faces market prices of w = 6 and r = 4. These prices then shift to w = 4 and r = 2.
a. In which direction will the substitution effect change the firm’s employment and capital s tock?
b. In which direction will the scale effect change the firm’s employment and capital stock?
c. Can we say conclusively whether the firm will use more or less labor? More or less c apital?
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